Transocean Ltd (RIG) 2006 Q3 法說會逐字稿

Good day everyone, and welcome to the third quarter 2006 earnings release conference call for Transocean. Today's call is being recorded. And now for opening remarks and introductions, I would like to turn the call over to Mr. Jeff Chastain. Please go ahead sir.

Thank you, Dana. Good morning, and welcome to our review of the financial results for the third quarter of 2006. A copy of the press release covering our financial results along with supporting statements and schedules is posted on the company's Web site at Deepwater.com. Also note that the Company has posted to its website a file containing four charts that will be discussed during this morning's call. The file containing these charts can be found by selecting Investor Relations followed by presentations.

Participating in this morning's call are the following Transocean senior managers: Bob Long, Chief Executive Officer; Jean Cahuzac, President; Steven Newman, Executive Vice President and Chief Operating Officer; Greg Cauthen, Senior Vice President and Chief Financial Officer; David Mullen, Senior Vice President Marketing and Planning; and David Tonnel, Vice President and Controller. As has been our practice, we will begin with some opening comments followed by a question-and-answer period.

Before I turn the call over to Bob Long, remember that during the course of this conference call, participants may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts, including future financial performance, operating results, and the prospects for the contract drilling business. As you know, it is inherently difficult to make projections or other forward-looking statements in a cyclical industry since the risks, assumptions, and uncertainties involved in these forward-looking statements include the level of crude oil and natural gas prices, rig demand, and operational and other risks which are described in the company's most recent Form 10-K and other filings with the U.S. Securities and Exchange Commission.

Should one or more of these risks and uncertainties materialize or underlying assumptions prove incorrect, actual results may vary materially from those indicated. Also note that we will use various numerical measures in the call today which are or may be considered non-GAAP financial measures under Regulation G. You will find the required supplemental financial disclosure for these measures including the most directly comparable GAAP measure and an associated reconciliation on our website, and for your convenience, non-GAAP financial measures and reconciliation tables are included with today's press release.

That concludes the preliminary details of the call. I'll now turn it over to Bob Long.

Thanks, Jeff. Good morning, everyone. As you saw from our press release, results for the quarter were better than expected. Costs were well within our guidance in August and we had our first quarter where revenues exceeded $1 billion, as average day rates improved along with higher activity and some improvements in rig efficiencies. This led to earnings of $0.83 on an adjusted basis, which were higher than consensus. The lower costs were due in part to unavoidable delays in some rig maintenance and shipyard projects that we had intended to complete in the quarter.

So you can expect Q4 costs will be up correspondingly from our previous guidance, but will still be pretty much in line with where we had guided back in August for the second half in total. Staying with costs for a minute, we're in the process of finalizing our 2007 budget and currently do not see any reason to change our earlier guidance on operating costs for the rigs for 2007. We do anticipate an increase in reimbursables and integrated service costs, which will be fully offset by increased revenues. Greg will give you some details of that in his comments.

You also saw that we have now completed $3 billion of our authorized share repurchase program. We borrowed $2 billion, $1 billion under a new short-term bank facility and $1 billion in two-year notes and used the funds to repurchase and to pay down balances on our revolver. The borrowings and buyback will have little to no impact on 2006 earnings, but given consensus earning expectations for 2007, should be very nicely accretive next year. I continue to believe that our stock price does not reflect the value we've created with our backlog, and the exceptionally strong fundamental outlook for our business for the foreseeable future, and that our stock repurchase program continues to be the best way to return cash to our shareholders.

Before I turn it over to Greg for some more detail on the quarter, I'll give you my sense of what's going on in the market. In a nutshell, it continues to be very good across all asset classes. The float of business in particular continues to see unsatisfied demand and growing interest among operators for additional capacity. Since our last conference call in August, we've announced one additional new build contract and entered into discussions on two more. There's no guarantee that any of these additional new build discussions will come to fruition, but I do think it's a very positive indication for us. At the same time, several options to order new builds have been allowed to lapse by some of the speculators and several of the deepwater floaters currently being built by speculators have been contracted at attractive day rates. All this reinforces my belief that the floater market and particularly the deepwater floater market is going to be remain strong for a very long time.

For those of you that have accessed the Webcast, you can see from chart 1 that our backlog has grown to over $20 billion and gives a high degree of comfort that our revenues are going to continue to grow for the next few years. Chart 2 shows how our average day-rates by class of rig will grow if you consider only the rigs applicable to the rigs already contracted. Before we start (indiscernible) many of our contracts will drive our average day-rates higher quarter on quarter throughout 2007.

Now I'm going to ask Greg to give more details on the numbers and then David Mullen, our new Senior Vice President of Marketing and Planning, will add a little more detail on the market, and Steven Newman, our new Chief Operating Officer will comment briefly on shipyard projects before we open it up for questions. Greg?

Thanks, Bob, and good morning to everyone.

In the third quarter of 2006, we had net income of $309 million, or $0.96 per diluted share, or $0.83 per diluted share after adjusting for gains for rig sales. This compares to net income of $249.5 million or $0.75 per diluted share in the second quarter of 2006 or $0.42 after adjusting for gains for rig sales. During the third quarter and through the end of October, the Company repurchased an additional $2 billion or 27.9 million shares of our stock. This brings ordinary shares issued and outstanding to approximately 292 million shares. However, our share count used to calculate fully diluted earnings per share was 11 million shares higher than our actual average share count during the third quarter due to the dilutive effect of options, warrants, and convertible bonds. Assuming no more share buybacks or option exercises during the quarter in today's stock price, we would expect the weighted average diluted shares to be roughly 307 million shares in the fourth quarter of 2006.

Total revenue for the third quarter improved to $1.026 billion from $853 million in the second quarter. $84 million of this increase in revenues resulted from the commencement of higher day-rate contracts. The remaining increases stem primarily from a decline in out of service time and the effect of a longer quarter. In addition, revenue in the third quarter benefited from the postponement to the fourth quarter of several shipyards, an increased level of recharges, and a higher than expected level of operational efficiency.

In the fourth quarter, the commencement of higher day-rate contracts should lead to higher average day rate as shown in chart 2 and thus higher revenue. This increase in revenue is expected to be partially offset by higher out of service time compared to the third quarter as you can see in chart 3. Contributing to the higher level of expected out of service times are the acceleration of the planned Discoverer 534 shipyard, the commencement of shipyards on three jack-ups in preparation for their new integrated source contract in India, the mobilization of the Jack Bates from Australia to the Gulf of Mexico, and the mobilization of the Deepwater Expedition from Brazil to Egypt.

As we look forward to 2007, revenue increases due to the commencement of higher day-rate contracts should continue to be very meaningful. Out of service time in 2007 should decrease compared to the level experienced in 2006 with a completion of the three rig reactivations. We also expect to see our integrated services and recharge revenue increase substantially in 2007 to $240 million. As you may recall, during the integrated services, we supply logistics and well planning for our customer in exchange for revenues that offset the related integrated services cost, plus a small margin.

We are increasing our integrated services activity in India from one rig in 2006 to six rigs in 2007. Our estimate of 2007 integrated services revenue recharges is $75 million higher than our August guidance as we are now including fuel recharges and similar zero or low margin items which will have little or no impact on the bottom line.

Operating and maintenance expense in the third quarter were approximately $561 million versus $549 million in the second quarter. Our costs in the third quarter were well within our guidance of $550 to $575, although an $8 million postponement of costs from the third quarter to the fourth quarter related to planned maintenance activity was offset by a $10 million increase in costs related to higher recharges and integrated services revenue. Out of service costs in the third quarter included $31 million of reactivation costs versus $39 million in the second quarter.

As shown in chart 4, our higher in-service costs due to continued cost inflation and increased activity following the reactivation of two rigs were partially offset by a decrease in out of service costs due to the significant decrease in reactivation activity. In the fourth quarter of 2006, we expect our operating maintenance costs to be between $530 million and $550 million, slightly higher than our August guidance, primarily due to the previously mentioned postponement of planned maintenance activities out of the third quarter. The expected decrease in operating maintenance costs from the third to the fourth quarter is due to lower costs related to reactivation. Our August cost guidance of roughly $1.1 billion for the second half of the year remains valid.

As Bob indicated, we expect our 2007 operating and maintenance costs will essentially be in line with our August guidance net of recharges and integrated services. A significant portion of our expected cost increase in 2007 over 2006 relates to the previously mentioned increase in integrated services activity. We now expect our integrated services revenue and recharges to approximate $240 million versus the $165 million we expected in August. This increase in revenue has a similar impact on our costs, roughly an increase of $75 million over our August guidance, but little or no impact on the bottom line. With this and other changes from the recent completion of our 2007 budget process, we now expect to see total operating maintenance expenses for 2007 in the 2.4 to $2.45 billion range.

Net of integrated services and recharges, the projected increases in operating and maintenance expense year-over-year are due to continued inflationary pressures as well as an increase in the number of operating rigs following the three rig reactivations, as well as the completion of the upgrade of the Sedco 702. We continue to expect inflationary pressures on labor, maintenance, and shipyards of around 10% annually or 2.5% per quarter. These increases are expected to be partially mitigated by reduced costs related to the completion of our three rig reactivations, although similar level of normal shipyards will continue to be sustained in 2007.

Capital expenditures in the third quarter of 2006 were approximately $434 million and are expected to trend down to $230 million in the fourth quarter. Of the $950 million of capital expenditures expected for the year, roughly $215 million relate to the two 700-series upgrades, $450 million relates to our three enhanced enterprise class drill ships, $43 million relates to our three rig reactivations, and the remainder relates to contractually required upgrades, fleet spares, and normal operations. We expect capital expenditures for 2007 to be roughly $1.2 billion of which $640 million will relate to the new build drill ships and $205 million relates to the two upgrades. Capital expenditures in 2008 should decline to around $900 million with a completion of the second 700 series upgrade.

Depreciation in the third quarter was lower than previous quarter and lower than our guidance as we sold or reclassified as held for sale several of our nonstrategic rigs. We expect depreciation to be approximately $100 million in the fourth quarter of 2006, growing to around $115 million by the fourth quarter of 2007 with the completion of the 702 upgrade and its operating upgrade capital items are placed in service during the year.

We expect interest expense to rise to $42 million in the fourth quarter from $27 million in the third quarter as our added debt will impact an entire quarter. During 2007, our interest expense should decrease to 10 to $15 million a quarter by the end of the year assuming our free cash flow is largely used to pay down the new debt, complemented by an increase in the amount of capitalized interest to roughly $20 million per quarter with a continued investment in upgrades and new builds.

Finally, for the remainder of 2006, we expect our effective tax rate to continue at the 17.5% seen in the third quarter. In 2007, we believe our effective tax rate should approximate 16% but the actual rate may be impacted by the adoption of the new income tax accounting pronouncement, FIN48. With that, I'll turn it over to David for the marketing outlook.

Thanks, Greg, and good morning to everybody participating on the call. We have had a good quarter and firm contract additions, highlighted by a third new build enhanced enterprise class drillship anchored by a long-term contract. We achieved some excellent day rates and term commitments in midwater and jack-up asset classes as well. The current backlog now stands at more than $20 billion, which represents approximately $800 million growth quarter on quarter. The market outlook remains positive for each of our major asset classes.

I will start our discussion of our high specification fleet, which includes our deepwater and harsh environment assets. In the past quarter, we announced a firm commitment for a new build enhanced enterprise class dual activity drillship for the Gulf of Mexico for Chevron at a day rate of $472,000 for a five-year term. Additionally, we have ongoing dialogue with a number of operators in other new build opportunities. We also added a fixture to our other deepwater floater rig fleet, as this class of rig continues to build backlog to 2009 and beyond. In Norway, Statoil committed to a 30-month extension of Transocean Leader with a contract extension commencing in January 2009 at a day rate of $429,000. The strength of the market on the high spec fleet is reflected in the fact that there is only one out of a fleet of 33 rigs with time available in 2007 and 2008. There is a lot of operator interest in this rig, particularly as it pertains to its availability.

The recent easing of hydrocarbon commodity prices does no appear to have altered E&P operators' deepwater plans. Looking forward, we continue to see strong demand in all deepwater areas and see upside in the emerging and frontier deepwater provinces such as Mexico, South China Sea, India, and the Mediterranean. In the midwater sector, we continue to see strong demand with two leading-edge fixtures in the third quarter highlighting this strength in demand. Amerada Hess Equatorial Guinea signed the Sedco 700 for 12 months firm extension for $362,500 per day. Daewoo in [Myanar] contracted the Sedco 601 to work in 2600 feet of water depth using the technology of surface stack drilling for a three-well campaign at a day rate of $406,000. The surface stack technology extends the water depth capability and in this case to 2600 feet from the conventional capability of 1200 feet.

The North Sea and in particular the Norwegian sector of the North Sea is experiencing a high level of demand with bidding activity higher than what we would have expected at this juncture. We remain optimistic on the midwater sector and are in advanced discussions with a number of customers on term contracts for midwater rigs with availability in 2007 and 2008.

Turning finally to our jack-up fleet. Despite the migration of jack-up rigs out of the Gulf of Mexico and the appearance of first new builds into the marketplace, the international jack-up market remains robust. We had two new fixtures this past quarter in Vietnam. JVPC signed the Trident IX for a one year extension at a day rate of $210,000. And [Viet Petro] signed the Trident VI for a four-well extension with a minimum duration of 400 days at a day rate of $193,000.

Additionally, we're in advanced discussions with a national oil company on a multiyear deal for another of our jack-ups. The international jack-up market continues to absorb additional capacity of premium rates and the ongoing inquiries from our customers suggest that this market will remain robust for the foreseeable future. Consistent with our strategy of upgrading our overall fleet quality through selective upgrades, new builds, and asset dispositions, we have completed the sale of three tender rigs over the last three months for net proceeds of approximately $70 million.

That concludes my marketing comments, so I'll turn it over to you Steven, for comments on shipyard projects.

Thank you, Greg, and good morning, everyone. As we have discussed over the last couple of quarters, much of the variability in our reported financial results has been due to shipyard significant projects. We currently have three major projects underway in addition to our new build project, and I wanted to give you an update on how those projects are progressing.

The C. Kirk Rhein, our last reactivation, is progressing well in Lamprell shipyard in Dubai. The rig arrived there on September 19th, following mobilization from its stack location in Mobile, Alabama. The shipyard work scope there involves full commissioning of the rig's marine and drilling system and is anticipated to be completed in January, after which the rig will mobilize to its operating location off the east coast of India. We currently expect that the Rhein will commence its two-year contract with Reliance in February of next year. We have two major contracts ongoing in Singapore, the Sedco 702 in Keppel FELS yard and the Discoverer 534 in Sembawang shipyard.

The 534 arrived there on September 15th following its one-well campaign for Husky in China. The work scope for that rig involves a previously scheduled life extension including overhauling the rig's thrusters, increasing the rig's variable deck load, updating the rig's electrical, generating and distribution systems, and general repairs to the marine and drilling systems. Including time for commissioning and sea trials, we expect the rig to depart shipyard in mid-March for a one-well campaign with Shell in Pakistan, after which the rig will commence a two and a half year contract with Reliance in India.

The Sedco 702 is the first of our two deepwater semisubmersible upgrades. The work scope there is fairly extensive and involves conversion of the rig from standard water depth moored configuration to deepwater dynamically positioned mode. This will entail major modifications to the rig's hull, power, marine, and drilling systems. The rig arrived in the yard on the 15th of April this year and we expect to be on location operating for Shell in October of next year. The second deepwater upgrade involving the semisubmersible rig Sedco 706 is not expect to begin until June 2007, with the commencement of a three-year contract with Chevron due to begin by April of 2008. Both of these semisubmersible projects will be undertaken in the Keppel FELS yard in Singapore.

Turning to our three new build projects taking place in Daewoo's Okpo Korea shipyard, we are continuing to finalize the design and engineering of these enhanced enterprise class rigs. We anticipate cutting steel on the first [full], which is destined for operations with Chevron in the Gulf of Mexico in February of 2007, and we're maintaining a project schedule for the first rig to commence operations during the second quarter of 2009. The other two rigs will follow in measured succession, the first in mid-2009 for operations with Hydro in the Gulf of Mexico, and a second in second quarter 2010 for Chevron, also in the Gulf of Mexico. While still early in the process, these projects remain within their original budgets.

Looking ahead, the company has a number of smaller projects commencing over the next couple of months, and we will be actively managing these to ensure they are executed in a safe and efficient manner. Our monthly fleet status report includes the expected timing and duration of the scheduled projects for 2007 and a number of those currently scheduled for 2008. With that, I'll turn it back over to Bob to kick off our Q&A.

Thanks, Steven. I think with that, we're ready to take some questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] We'll go first to Geoff Kieburtz of Citigroup. Go ahead, sir.

Good morning.

Good morning.

On the downtime question, I think that clearly you've given us a lot in terms of the planned downtime. Can you give us any progress report on unplanned downtime? It looks like in the quarter, you had pretty decent utilization, but what has your unplanned downtime history been, and what's current performance?

You want to answer that, Greg?

Sure. Let me speak of unplanned downtime by what we call revenue efficiency. Because that's really the impact on the bottom line. For the first six months of this year, our revenue efficiency was about 94%. And that 6% is due to a variety of things. Downtime, unplanned downtime, as well as the contractual provisions where we earn lower day rates due to waiting on weather or nonoperating day rates, a lot of our contracts will have slightly lower day rates for those.

You combine all that, and you get this -- got this historical through first half of the year of about 94%. In the third quarter, that has risen to 95%. And that 1% improvement drove about a $10 million increase in our revenue. And that percentage going forward, that 95% is roughly what we would expect across our fleet. That varies by rig type and by jurisdiction and depending on contracts for midwater, and jack-ups tend to have a lot higher revenue efficiency, 97, 98%. And our high spec between 94 and 96%. But that 95, 96% is what we'd expect going forward.

Okay. So you're kind of at your target performance in the third quarter?

In the third quarter. We, frankly were below it in the first half of the year, but we're at it in the third quarter.

Okay. And on the major projects, I think we got the message that schedules are being kept intact. Can you comment at all on your estimates for the cost of the major projects?

We think that the costs that we're currently seeing are well within the guidance that we gave you in August pertaining to the second half of 2006, and similarly well within the guidance we've given for 2007. So as Greg mentioned during his discussion on cost, we are seeing inflation, but it's well within what we are anticipating going forward.

Okay. A question for you, Bob. We had a conversation some time ago about what would be an early signal of maybe some softening of the market and you suggested that maybe options not being exercised would be a little bit of a concern. And we've seen at least one deepwater or harsh environment rig contract -- or option not being exercised, and I wondered if you had any thoughts on that as to why we shouldn't be concerned about that?

I'm not sure what's behind the decision not to exercise that option and it's pretty far out, so I don't take that one indication as meaning very much at all. Right now we see all the signals in the market continuing to be very positive. And particularly on the deepwater market, where I think the option you're referring to is on one of the ocean rigs.

Right.

And 2009, my take on that market in 2009 is even better today than it has been in the past. We've seen a very significant increase in customer interest in additional deepwater capacity long-term. I suspect that that just happens to be a specific condition of the operator and not indicative at all of what's going on in the market.

Very good. Thanks very much.

We'll go next to Roger Read of Natexis Bleichroeder. Please go ahead, sir.

Yes, Roger Read. Good morning. You've mentioned two new builds that you're in negotiations with. I guess that would go somewhat to countering the concern about maybe a rig being let go on an option. Can you give us an idea, are those again drillships, are you looking at semisubmersibles? Have the costs changed significantly from the previous announcements?

The discussions that we're having are again for Clear Leader type drillships. Costs are -- the cost indications we have from shipyards are up a bit. We probably had 20 or $30 million to the cost of the rigs that we've already announced. Pretty much in line with what we've seen continuing as we -- every time we go back to the shipyards, there's a little bit of increase. Not coming from the shipyards in general, but mostly from the equipment suppliers.

Okay. Greg, a question for you. It seems that from the third quarter performance here on operating costs, your expectations for the fourth quarter and if we take second half '06 as a whole, your comments in '07 looks very much like before. You feel you've got a better handle on the operating cost situation here? And what have you, if anything, done differently from say this time last year than through the first part of 2006 to become more comfortable with the outlook for what's going on the cost side?

Yes, we are comfortable with our costs. We have been working on a variety of initiatives over the last year. We've gone to a rolling, forward-looking forecast process that we complete every quarter. So instead of just looking at our current calendar year budget, we add five quarters forward. So in June, we look forward through three quarters of '07. That gives us some forward-looking -- it gives us focus on cost trends in issues a lot earlier.

I will say that we just started doing that this last year, and frankly we see continual improvement every quarter we do that. So it hasn't been perfect so far, but it's certainly gotten a lot better. And because of that, we had a much better budget process during the fall that we've just completed. So we feel good about that budgeting forecast process.

In addition, for a couple of years now, in one of our units, we've gone to an asset management approach where instead of the traditional rig manager being responsible for everything on a rig, we split out the asset management, the maintenance, and the shipyard activity, reporting to an asset management group. And that unit, we really are starting to see a much better understanding of our maintenance and a better ability to forecast it and we're starting to roll that out across the fleet, although that will take a year or two to actually roll that out.

The combination of those big initiatives gives us a lot more comfort in our cost. And then as we said before and as Steven mentioned, a lot of the variability of our costs this year has related to the rig reactivations. And we're in the process of reactivating our last rigs in January. We'll be out of the rig reactivation business with all of our fleet operating, other than our two upgrades. But no more reactivations. That should take away a big variability in our cost.

Okay, thank you.

We'll go next to Lee Cooperman of Omega Advisors.

Just two questions, if I may. The stock price seems to gyrate with every little change in the price of oil. I was wondering if you could give me a little tutorial as to what level of oil prices, in your opinion, would represent a threat to the robust drilling activity in the deepwater? That would be question number one.

And then question number two is, since the stock is hovering around the average price you paid for the $3 billion you bought back, do you have a timetable as to when you would like to complete the remaining billion, assuming the price stays about where it is? And adjunct to that is the 292.4 is the actual shares outstanding on October -- whatever the date was -- 31st or something. And you gave an average share count for the fourth quarter. But I assume going into next year, the average share count would continue to drop, so I guess my question is, what is the difference between your actual shares outstanding and fully diluted? Is it about 5 or 6 million?

It's 11 million. It was 11 million during the third quarter and absent a change in the stock price, we would expect it to be 11. That's the big difference between the 292 and the 307. The other difference is some of those shares were bought back in October, so with the weighted average, it's higher.

So go back to the first two questions, the anticipation for the remaining billion in terms of timetable. And also, if you could give us a little tutorial as to what price level would represent an issue for deepwater drilling?

On the oil price question, Lee, it's tough to give you a tutorial. To tell you our impression, and it's based on a lot of discussions with our customer, particularly the major customers, we're pretty comfortable that what we're hearing is that oil prices down to $40 and maybe even down to $35 would have little or no impact on the deepwater market. I think you might start seeing some impact on the North Sea midwater market once the rates get down into that 35 to $40 range, but I don't think there's any fundamental issue with the economics of the deepwater plays, at least the vast majority of them, with oil prices down even into that 35 to $40 range.

Okay. The other question?

On our plans for the repurchase program, I'd say near term, we're going to be concentrating on trying to capture the additional reinvestment opportunities we see with all this continued interest in new builds from our customers, and we may also pay down some of the additional debt. Longer term, we do, of course, plan to continue and execute fully on our $4 billion authorized program, but how, when, and at what price we execute the completion of the program is not something we're really prepared to comment on right now.

One other question, an observation on my part, I'll be curious to your reaction. To the extent this recent backdown in the price of oil could almost be viewed as being positive for the company to the extent it might quell some of this speculative new build activity as people get a little bit more nervous. Is that a fair observation as opposed to keep seeing prices rise and attracting a lot more capital to the business?

I think that is a fair observation. I don't know whether that's what's been part of what's triggered some of the speculators to pass on some of the options that they had with shipyards, but it could be a factor. Though, right now, the market for the deepwater business is particularly strong and, as I said, we're even starting to see some of the speculator rigs get contracted at good rates. So this market is holding up very well. Whatever is causing the slowdown in new orders, it's positive, and perhaps what you speculated on is contributing to it.

Thank you very much and good luck.

We'll go next to Dan Pickering of Pickering Energy Partners.

This is like a replay of last quarter only lots, lots better.

Thanks, Dan.

You bet. Bob, when we look at 2009, it looks like your backlog there is up a couple hundred million since the analysts meeting. Can you walk us through what your expectations are for 2009 bookings? You said you're seeing more interest. How contracted do you want to be, how quickly, and just walk us through that opportunity.

I'm not sure I can give you a crisp rig by rig answer to that, but I'll tell you philosophically in terms of the question of how contracted do we want to be and how anxious are we to contract, we are in a position right now where we have almost all of our deepwater high spec capacity contracted in '06, in '07 and '08 and a lot of it in '09. The availability that we do have, we have not been overly anxious to contract. We've got a lot of discussions and a lot of bids that we put in, but if you look at the deepwater business where we really only have the Richardson available in '07, we've been pretty aggressive on the rate expectation that we have. And since we have a fair amount of time before that rig is available and we have a lot of customers that are interested in it, we've been trying to capture some very high rates.

Whether we'll be successful or not, we don't know. But for now, given the limited amount of capacity that we have, we are continuing our efforts to try and see if we can move this market a little bit higher. Right now, of course, with the operators on the other side of that coin, with the time that they have available before the contract would start, there's not a big urgency for them to run out and sign something up. So that's why you may not see a whole lot of new signings coming on quickly here, because both sides have some time here to push their agendas.

Okay. And then on the new build side, just trying to think about the -- it sounds like as an organization, you feel comfortable moving forward with some incremental new build activity. When would -- if you were successful in your contracting, when would a rig be delivered if you got a contract today?

Well, if we got a contract today, and I mean very promptly, we would probably get a delivery -- we have a delivery slot that would bring the rig out very early 2010, probably would be ready to drill by the second quarter of 2010. If we don't place those orders fairly soon, those delivery dates are likely to slip by as much as six months. You would be looking at the middle of '10, probably start on location end of '10 or beginning of '11.

Any interest on your part to push ahead with now builds without a contract?

None.

Thank you.

We'll take our next question from Thomas Curran of Wachovia Capital Markets.

Good morning, guys.

Good morning.

I was hoping you could give us an update on the various tax disputes you're involved in and the probability, timing and potential size of costs that might hit in Brazil and Norway and benefits you might realize with regards to TODCO.

Greg will answer that question very briefly.

We really can't on Norway and Brazil. Those are both ongoing tax disputes. So other than what we've said previously in the Q and when you see our Q today, you'll see that hasn't changed at all. We really can't comment on that. On TODCO, that is in arbitration. We are hopeful to get a rule from the arbitrator by the end of the year. Until we get that ruling, the benefit we could recognize this year would range anywhere from zero to $30 million to $60 million, but it depends on the ruling from the arbitrators, and we really can't talk about probabilities other than what we've already said in our financial statements.

That's helpful, thank you. As a quick follow-up, shifting to operations in the field, Steve, I was wondering, as you take delivery of new components and put them to work, are you seeing or encountering any mechanical problems or other issues with new equipment and in particular here, I was thinking of top drives?

Well, I'll tell you what we've done. We have identified the critical components on each project and for those critical components, we're working very closely with the vendors. So in a lot of cases, we've actually stationed Transocean people in those shops no observe the overhaul and rebuild work going on. We've heightened the level of factory acceptance testing that goes on before the equipment ever leaves the shop, and consequently, we anticipate once it arrives on the rig, it's generally in a ready to go state and minimizes the risk in installation and commissioning on the rig. So we're fairly confident that we've identified where the critical issues are and that we're attacking them very aggressively.

Great. Thanks, that's helpful.

We'll take our next question from Robin Shoemaker of Bear Stearns. Please go ahead.

Yes. Bob, I wanted to ask you, and you've commented on the past that you thought that some of the speculative deepwater builds as well as the jack-ups might be for sale, but as you noted earlier in your comments, recently several of these speculators have signed good contracts at good rates, and I wonder if that opportunity really continues for Transocean as meaningful. And is it a reason to keep the balance sheet significantly underleveraged in the event that such an opportunity were to come your way?

It's tough, really, to give you any crisp conclusions on the likelihood of some of those assets changing hands. I would say that we go -- we seem to go through cycles here where there is some interest expressed potentially with some of the speculators and new owners in selling assets and then at other times, that interest seems to wane, but then it comes back. Right now I would say we're in a period where there isn't as much going on in that area in terms of expressed interest as there have been at other periods in the past. But I don't think that means a lot. I think that we have to continue to monitor the potential opportunities here and it's hard to tell what's going to happen as we get closer to the dates when some of these rigs will be delivered. And depending on what their contract status is or if they don't have contracts, then obviously the incentives and potential opportunities could change. So we do want to maintain a lot of flexibility to be able to take advantage of any opportunities that come up in that sphere.

Is your -- do you still believe that the delivery dates we see published for these deepwater rigs -- not your own, but the others -- could slip very substantially with the large volume of construction activity and equipment that's been ordered?

I think that if you just go on the history of this business, you have to be concerned about delivery dates slipping. And I think that once you get into the final commissions stages of these rigs, that you're going to see some significant slippage in terms of when they actually get out of the shipyard and are able to commence drilling on their first location. So, yes, I continue to be concerned about that.

Yes. Okay, thank you.

And we'll go next to Walter Lovato of Passport Capital.

Good morning, guys. I just wanted to touch on the share repurchase and really applaud and congratulate you for really taking leadership here in this industry with this respect. This morning I saw an analyst report that described your repurchase as gargantuan, and I guess my comment to that would be hardly an appropriate adjective to use given you only have $3 billion in debt and will generate $1 billion in cash flow in the next couple of quarters, $3 billion next year and $4 billion in '08, and with 76% contracted in '08. So I guess my comment would be as a shareholder if Mr. Market wants to sell you your stock at six times '08 earnings, than go right ahead and show Wall Street what gargantuan can really mean.

Thank you, we'll keep that in mind.

Thank you.

We'll go next to Ben Dell of Sanford Bernstein.

Hi, guys.

Hi.

Your last conference call, you highlighted some concerns around the market in '09 and 2010. Since then, oil prices are down, cash flow to the upstream players is down, new builds are up, including your own. I'm wondering if you can just walk through what changed your thinking on the market out there and sort of how your supply/demand dynamic you think has changed.

Okay. Well, first I would say that even back then I wasn't that concerned about the market, but what has changed in the last three months, I think is a number of things. We've seen a lot more interest from operators in additional capacity. The number of new build discussions and possibilities that have come up are really pretty interesting and we've also seen a number of the speculative rigs that are on order get contracts and they are getting contracts at pretty nice rates. When we look at some of the fundamental developments in the deepwater market, Pemex has now finally come out with a tender for two deepwater rigs. We understand they are going to follow through with their plan to come out for a third deepwater rig. There's a whole new province that's going to open up that has a lot of potential for activity.

The deep play in the U.S. Gulf is now looking like it's going to be real. We're seeing additional activity potential in deepwater in the Eastern Mediterranean. India continues to be a growing market. So if you just look around the world, the fundamentals for the deepwater market continue to look better and better to us, and right now I think that the ability of the market to absorb all of that new build capacity that's out there is certainly there. And I do think we're going to see additional capacity brought on hopefully to term contracts, but the market to us looks like it's going to be particularly strong past 2009, 2010, 2011.

Okay. Is it fair to say then, just following up on Lee's question about what economics people drill down to. Your view is that there's no correlation of oil price for demand for rigs above $40 a barrel?

I think for most of the deepwater activity, certainly all of the deepwater activity that is driving the demand in the near term was planned quite a while ago, and I don't think it's sensitive to oil price below $40 a barrel. I think most of the big new plays are also going to be economic at oil prices that are down to $40 a barrel. So right now, I don't see that as a particular concern and it's anybody's guess as to where oil prices are going to go, but I'm not hearing too many people guess they're going to go below $40.

Okay, but by definition if you believe these reserves can be brought on below $40 a barrel, wouldn't that suggest the long-term oil price should be below $40?

I'm not sure that I'm a good enough economist to answer that question very crisply, so I'll pass.

Okay. And maybe if I could just follow up. You highlighted like a number of players have that Middle East activity has been picking up. Have you seen any slowdown associated with the OPEC cuts or any drop in activity, drop in capacity expansion plans? Any moderation associated with scaling back?

David, do you want to answer that?

No we haven't. Bear in mind that the Middle East activity, especially the offshore activity, is largely driven by L&G style projects, which are large capital investment projects, again, longer-term planning. But to answer the question, no, we haven't seen any slowdown whatsoever. In fact, Saudi Aramco continue to increase their demand for rigs both onshore and offshore. Qatar remains a highly active unit and the outlook is extremely positive there.

And lastly, on your chart on page 4, you show jack-up rates pretty much flat 3Q '07 to 4Q '07. Do you have a view on when the jack-up market is turning over?

We see the jack-up market as day rates have to an extent plateaued, but what we are also seeing is that as the additional capacity is coming in with the new build construction, they continue to get absorbed and continue to get absorbed at the high day rates. So for the foreseeable future, we are not concerned about the jack-up market. There's a lot of demand in the Middle East. Asia remains very robust and we see this market holding up for the foreseeable future.

Specifically to your question about the jack-up rates turning over, we do not see any indication of that right now. We do think that it's difficult to push the rates much higher. We're seeing a lot of resistance there, but we're being very successful at continuing to bid in that 185 to low 200s range and we're getting contracts there. So we haven't seen a turning or any indication that there's going to be a turn in the near future.

We'll take our next question from [Morton Nystrom] of Kaupthing Bank. Please go ahead, your line is open.

Great quarter, guys. Just a question. I just heard that -- just an example that [Mashk] Oil has committed the same number of drilling rigs that Exxon Mobil has. Mashk produces, I think it's around 700,000 barrels per oil, Exxon, 4 million. Are you seeing the same thing here that the supermajors and the big oil companies are running behind the curve when they have committed drilling rigs?

No, we're not seeing any indication that the supermajors are paring back their activities. Particularly in the deepwater, the supermajors are extremely activity. Exxon, I think, is probably an anomaly, and most of us have a little bit of difficulty understanding exactly what Exxon's strategy is. Part of the explanation for the relatively low activity from Exxon is the fact that they take a lot of positions where they are 50/50 with other major operators, but they let the other operator be the contractor and the one who operates the rig. So I think Exxon is a lot more active than you see by just counting the number of rigs they have under contract.

Just last question. Given your balance sheet for pretty much all the drilling companies, you're seeing an extremely strong balance sheet; you have a little debt and a little bit of bad capital structure. Do you believe that going forward we could see leverage buyouts, private equity funds entering into the oil service industry?

Well, that's difficult to give you a crisp answer to. There's certainly been a lot of speculation about the leverage buyouts in the sector and if you look at the capital that's available to these financial players, you would guess that you certainly wouldn't be constrained by the availability of the capital. It is a difficult industry in my opinion for leverage buyout players to get very active in, because of the cyclicality of it. But having said that, I wouldn't rule it out.

Thank you.

We'll go next to Ted Izatt with Bear Stearns.

Thank you very much. Congratulations on your quarter. My question was a follow-up of the last one a little bit. You started out the conversation by saying that you feel your shares are still undervalued. And of the drillers, it seems you have the most number of contracts, some things going forward. Do you feel on the share purchase, can you say whether or not you are planning to extend the program once it's complete or possibly expand it?

We really are continuously evaluating our capital structure and our uses of cash, and we really haven't ruled out anything. So when we complete the repurchase program, whether or not we extend it or whether we consider other alternatives, I'd say everything is on the table at this point.

Okay. Have you got any -- can you give any guidance as to where you feel as a management that the shares should be valued, or is that too speculative?

That's way too speculative.

Okay. Thank you very much.

Okay.

Okay.

We'll go next to James Stone with UBS.

Just kind of curious. As you guys look at the new build opportunities and what you've been presenting, you've been very focused on building the Clear Leader and Clear Leader like units. I'm kind of curious as to why you haven't explored or haven't put a lot of emphasis on building additional semisubmersibles? Is it your preference, is it what your clients are looking for? Can you give us an understanding of that strategic move that you've made?

Yes. It's really a combination of factors, and we have explored some opportunities in the semisubmersible area. We are sensitive to the fact that we'd like to add some new capacity in our semisubmersible fleet. Most of the opportunities that we've seen to date have been probably more appropriate for the drillship design that we have, and I'll also tell you that we were much farther along with our drillship design and coming up with a complete design for a new harsh environment ultra deepwater semisubmersible that we were comfortable we could get crisp quotes from the shipyard on was a little bit more difficult. We continue to work on that and we have looked at some opportunities, and we're going to continue to try and refine that design issue. So don't think that you won't see us bidding, perhaps, on some semisubmersible new build opportunities in the future.

And are you only interested or approaching or looking at a semi in something that is ultradeep and harsh environment, or something that perhaps is not necessarily harsh environment? Are you really only looking at the ultraspec rig?

Our preference would be for high-spec ultradeep. If we had an opportunity for a contract for a lower-spec unit, we would certainly entertain it, although we would probably have higher return criterias, because we would be looking forward and trying to think about how that rig would compete with the more capable units after the end of its existing contract. So wouldn't rule it out, but it's not our preferred alternative.

With the cost creep that you're seeing or you expect to see on a Clear Leader 4 or a Clear Leader 5, are you getting -- do you anticipate or do you see any risk in not getting appropriate compensation in terms of the day rate?

If we did, we wouldn't be going forward with the contract. We've not relaxed our financial criteria in terms of what we're going to look for with new rigs.

That's all I had, thanks.

We'll go next to Scott Gill with Simmons and Company.

Good morning, Bob.

Good morning.

Any update on the dual activity patent with respect to revenue recovery opportunities going forward?

There's no real update, Scott. We're still waiting for the legal processes to run their course here with the Global Santa Fe litigation that we've had. I think that this -- we're pending a ruling here in terms of an injunction in that case and I'm sure that Global is going to appeal. So depending on how long that process takes, it may be a while before you see much crystallize in that.

Okay. And going back to it, I think a response you gave to Dan on new builds, you talked about an order placed today, expected that new build to be working in the field second quarter of 2010. Then you also said that if you didn't place that order shortly, that could slip by six months. It sounded like a six-week deferral in orders could result in a six-month deferral in delivery time. Just kind of curious why that time gap?

That's what the shipyards are telling us is that if we miss this slot, and we're presuming that is a function of where the -- most of what drives the shipyard's timing and what they're quoting to us is the delivery of the equipment from the equipment suppliers. So there's a risk that if we don't commit soon, that equipment gets committed to somebody else and the next production slot is just that much farther down the line.

Okay. And lastly, Bob, on your balance sheet and as it relates to stock repurchases, you've brought your net debt-to-cap up to low 30% range. Where is the point where you don't want to push that net debt-to-cap? Are we there or would you take it higher?

One, just to remind you, because of our corporate structure, we get zero marginal tax benefit for interest expense. So unlike a lot of companies, the optimal level of capital is a lot lower for Transocean, and we don't get any benefit to our cost of capital by having leverage. Because of that, we would target longer term a level of debt-to-capital really under 20%. However, the flip side is it doesn't hurt our cost of capital to add leverage like we have here, and so when there are appropriate opportunities to add leverage, as we saw the last quarter, we will add leverage to avail ourselves of those opportunities. So I wouldn't say that we're at the limit; we're certainly above our long-term target, but we will always be open to appropriate opportunities.

Okay. And lastly, Greg, what's your tax rate guidance for '07 as you see it today?

16%.

16%. Thank you.

And we'll go next to Arun Jayaram with Credit Suisse.

Good morning, gentlemen, nice quarter. Could you quickly -- I want to go over the cost credit with you again. It's 2.4 to 2.5 billion. Does that include an increase since August, or does that just include the $75 million of integrated service fees, which you will get through higher revenues?

My guidance was 2.4 to 2.45 billion and that's up from the guidance in August, predominantly the $75 million related to the gross up in revenue for the integrated services. And then there's another $25 million that's up. As we completed our budget process, we were presented a variety of projects from the field and about $25 million of those related to investments in recruiting and training and retention and some R&D on equipment that will produce revenue over time and that $25 million -- or more than that presented, but that's the $25 million that passed our budget process and is now included in our budget. That's the other piece of the increase.

So it's fairly flat?

That's exactly right.

Second question, you mentioned that Norway was looking relatively strong or better demand patterns you're seeing than you anticipate. Can you remind me where the leading edge rates for midwater units are and what's your outlook is for '07 and '08 for your rigs that have some available time?

In Norway, we had a fixed year this past quarter, the Transocean Leader at a rate of 429. So that's pretty much a leading fixture for that class of rig. It's actually a deepwater rig, it falls in the other deepwater category. But as we speak, we're in advanced discussions on some of the midwater fixtures that have time available out in '08 and '09. We're very pleasantly surprised with Norway in the term nature of the contracts. We're locking up contracts for the extended period of time.

Okay, okay. So you're still optimistic about that market going forward. Can you give us a sense for the non deepwater units where the rate structure is today?

The nondeepwater units, we're in the high 3s.

High 3s. Okay, that's all I've got. Thanks.

We'll go next to Judd Bailey with Jefferies and Company.

A couple of questions. First, Bob, if I could get your thoughts on why just in the last two or three months, it seems like -- and you even mentioned it, you had an increase in inquiries for new builds and for deepwater equipment out beginning in 2009. And like I say, it seems like it's increased in the last few months. I would be curious to get your thoughts on what exactly has caused that. Has it been one thing in particular, or a combination of other things?

I'm not sure I could really give you an answer to that. We've had a lot of interest from operators that kind of crystallize. A lot of these opportunities are things that they've been talking about, considering, and for whatever reason here in the last few months, they've actually now engaged and seem to be more serious about putting a time frame on and actually proceeding. I don't -- I can't point you to anything that says what triggered that, and it's coming from a spectrum of different operators, different sizes and different areas around the globe. So there's nothing that I could point to that would be a crisp explanation of what's changed.

Okay. My next question is a follow-up. During the prepared comments, it was mentioned there were term opportunities for intermediate semis. I just heard the comments on Norway. Could we get a little more color on in other markets you're seeing term opportunities for your intermediate debt semis and maybe which markets and what kind of term?

We're seeing a lot of interest in the midwater floater fleet in a lot of different areas. We've got interest in the Gulf of Mexico, there's a lot of new opportunities developing in the Mediterranean. We've got interest in West Africa. Right now we have letters of intent or are in advanced discussions with operators on three of our midwater rigs for rates in the $350,000 to $400,000 ranges and the terms for most of them are two or three years. We're really seeing a continuing interest in the midwater fleet, and there's really no one specific area. There are a lot of different areas where we're seeing that.

And if I could follow-up with that, you said $350,000 to $400,000 for two to three years. Would that be like a 2000, 2500 foot water depth?

Yes, a typical midwater floater in the 1500 to 3000 foot capability.

And we'll take our next question from Rob MacKenzie of Friedman, Billings, and Ramsey.

I wanted to revisit comments you made earlier about the capital structure for the company. There was mention from a prior caller about debt-to-cap. Is that the right way to think about debt for Transocean, or is it more appropriate to think about the debt level compared to the backlog? Is that how you think about it?

We actually think about it all different ways. You can think about it in terms of your EBITDA coverage. We certainly look at it in terms of the backlog, but we also look at it, as I said, in terms of the impact on our cost of capital and there is no benefit to the cost of capital for adding additional debt. So with all those factors, the actual important driver is financial flexibility. So what flexibility we have to pursue investment, reinvestment opportunities, whether those are in the new build opportunities we have discussed and additional share buybacks or whatever. But it's maintaining that financial flexibility that in the end drives us to not want to be overleveraged.

Okay. Then can you give me some color how you would think about or what your objections would be to project financing, for example, of the new build rigs as opposed to using equity cash and freeing up a lot of cash flow to, as a prior caller said, make a gargantuan share repurchase?

Well, one, unlike a lot of U.S. companies, we get zero marginal tax benefit for the interest expense on that project financing. So as you add additional project financing, you are reducing your financial flexibility. So we don't see the benefit to massive amounts of leverage for a drilling contractor. We think that reduces our financial flexibility in the long-term. Now 3.5 billion is not an insignificant amount of leverage, and that's what we have today.

But relative to a $20 billion backlog, that seems quite small.

Well, one, that's the revenue backlog, so you have to convert that to cash flow. It's still significant, but we also see a lot of opportunities in the future.

Okay. My final question is, looking at slide -- chart 3 on page 5, you have 26 out of service months for the first quarter of '07. Based on your last fleet status report, I'm counting 24. Has something changed since there that we should be putting in our model?

Yes. This is based on the fleet status report from October -- I mean, that was just filed, so, no, nothing's changed since then.

Okay, I'll go over it again. Thank you.

We appreciate all the interest in the Company here, but I think we're going to have to draw this to a close. So maybe we can just take one more question, if there is one.

Sir, there are no further questions at this time. I'll turn the call back over to you for any additional remarks.

Well-timed. I don't have any other remarks. I thank everyone for the interest in the Company and participating in the call and we'll do it again next quarter. Thank you.

And that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.